As a social psychologist, I have long been amused by economists and their curiously delusional notion of the “rational man.” Rational? Where do these folks live? Even 50 years ago, experimental studies were demonstrating that people stay with clearly wrong decisions rather than change them, throw good money after bad, justify failed predictions rather than admit they were wrong, and resist, distort or actively reject information that disputes their beliefs. In recent years, a new field has emerged—“behavioral economics”—to propose an alternative to the rational man of traditional economics. A spate of popular books and empirical studies have been published exploring human irrationality—in decision making, beliefs and actions. Researchers in this field are making up for lost time, or perhaps realizing that they are social psychologists after all.

As the offspring of traditional economics and experimental social psychology, behavioral economics shows remarkable hybrid vigor, and Richard Thaler, one of the new field’s founders, acknowledges its debt to psychological science throughout his highly enjoyable intellectual autobiography, “Misbehaving.” Indeed, his opening aphorism is Vilfredo Pareto’s 1906 claim that “the foundation of political economy and, in general, of every social science, is evidently psychology. A day may come when we shall be able to deduce the laws of social science from the principles of psychology.” That day is here, as Mr. Thaler explains.Misbehaving

By Richard H. ThalerNorton, 415 pages, $27.95

For all of his creative career spanning 40 years, Mr. Thaler, who is a professor of behavioral science and economics at the University of Chicago Graduate School of Business, has been studying “the myriad ways in which people depart from the fictional creatures that populate economic models.” As human beings who arrogantly and often wrongly consider ourselves “sapiens,” we simply don’t match the model of human behavior favored by economists, one that “replaces homo sapiens” (whom Mr. Thaler calls Humans) with “a fictional creature called homo economicus” (whom he calls Econ). “Econs do not have passions; they are cold-blooded optimizers,” he says. “Compared to this fictional world of Econs, Humans do a lot of misbehaving”—thus the book’s title.

The problem, Mr. Thaler argues, is that although economists “hold a virtual monopoly” on giving policy advice, the very premises on which that advice rests are deeply flawed. That is why “economic models make a lot of bad predictions”: some small and trivial, some monumental and devastating. “It is time to stop making excuses,” he admonishes his colleagues. Mr. Thaler calls for an “enriched approach to doing economic research, one that acknowledges the existence and relevance of Humans.” By injecting economics with “good psychology and other social sciences” and by including real people in economic theory, economists will improve predictions of human behavior, make better financial and marketing decisions, and create a field that is “more interesting and more fun than regular economics.” In that way, Mr. Thaler believes, economists will finally produce an “un-dismal science.”

That enriched (and fun) approach is on display in “Misbehaving.” Mr. Thaler’s goal in this conversational, informative book is to “tell the tale of how it all happened, and to explain some of the things we learned along the way.” He tells us that he began having “deviant thoughts” about economic theory as a graduate student in the 1970s—an unsettling experience for a not-yet-professor, comparable to having deviant thoughts about Freudian theory when it dominated clinical psychology.Advertisement

The book’s organization is both chronological, describing Mr. Thaler’s discoveries over time and productive collaborations with scholars from other fields, and topical, devoting long sections to findings from four areas of particular interest to him. These are “mental accounting” (with chapters on bargains and sales, sunk costs, budgets and gambling), self-control (the difference between people who plan and people who impulsively act), finance (including the irrationality of people’s behavior in the stock market), and fairness games (why people often prefer fairness to self-interest). In a two-person game in which one person must allocate, say, $50, most recipients would prefer to walk away with nothing than accept an offer they consider “unfair” (such as $5).

Dense with fascinating examples, each of Mr. Thaler’s topical areas tells, in a way, the same story: Traditional economics predicted X; evidence failed to confirm X and indeed often contradicted X; establishment explained away the evidence as an anomaly or miscalculation. For example, by the 1980s, investment guru Benjamin Graham’s classic, decades-old work on “value investing”—“in which the goal is to find securities that are priced below their intrinsic, long-run value”—had become passé. Mr. Thaler explains that Graham’s evidence of the benefits of buying cheap stocks rather than expensive, fashionable “darlings” had become inconsistent with the Efficient Market Hypothesis, which said that value investing simply could not work—not that anyone had bothered to refute Graham’s claim empirically.

Therefore, when the accounting professor Sanjoy Basu published a “thoroughly competent study of value investing that fully supported Graham’s strategy,” in the late 1970s, Mr. Thaler writes, he “had to offer abject apologies for the results” in order to get it accepted for publication; indeed, Mr. Basu “stopped just short of saying ‘I am sorry.’ ” When another economist found that the assumption of market efficiency was not supported by his data, he concluded that there must have been a “pricing model mis-specification.” When Mr. Thaler and Werner De Bondt, his psychology-and-economics graduate student, did their own research, using psychological principles to predict market anomalies that occur because of what they called the market’s “generalized overreaction,” the researched showed why the Efficient Market Hypothesis was wrong. Their paper, ultimately published in 1985, got in through the back door thanks to their having an ally on a major journal—without an apologetic conclusion. “Werner was too principled” to write one, says Mr. Thaler, “and I was too stubborn.”

Time after time Mr. Thaler cheerfully reports how many of his most famous papers in behavioral economics, often written with scholars across enemy lines (that is, noneconomists), were “pure heresy” that “got people’s blood boiling.” One article directly attacked the “core principle underlying the Chicago School’s libertarian beliefs,” namely consumer sovereignty: “the notion that people make good choices, and certainly better choices than anyone else could make for them.” By empirically demonstrating that consumers often do precisely the opposite, because rationality and self-control are bounded by human perceptual distortions, their paper undercut this principle. This was “treacherous, inflammatory territory,” he writes. In 1998, Christine Jolls, then an assistant law professor at Harvard, Cass Sunstein, a law professor at the University of Chicago, and Mr. Thaler published their groundbreaking paper, “A Behavioral Approach to Law and Economics,” which infuriated members of both professions in one blow.

Mr. Sunstein and Mr. Thaler then collaborated on another scandalous claim, that human beings are susceptible to cues in the environment that affect their behavior—a fact that governments and businesses can use to promote healthy behavior and wiser choices. Needless to say, many economists and others were outraged by the implication that the authors were promoting “paternalism” and intervention by government bureaucrats. Not at all, says Mr. Thaler. They were simply noting that “the knee-jerk claim that it is impossible to help anyone make a better decision is clearly undercut by the research.” No matter how often they added that bureaucrats are Humans, with their own biases, their critics wouldn’t listen, even when Mr. Sunstein kept repeating that they were not pro-paternalism but rather “anti-anti-paternalism.” Mr. Thaler preferred the term “libertarian paternalism,” but that didn’t catch on either. Eventually they found the right word to capture the gist of their argument, using it for the title of their book “Nudge.”

Accordingly, the final chapters of “Misbehaving” take on the key issue of nudging: “Could we use behavioral economics to make the world a better place? And could we do so without confirming the deeply held suspicions of our biggest critics: that we were closet socialists, if not communists, who wanted to replace markets with bureaucrats?” Yes, he argues, and yes. Because people make predictable errors, we can create policies and rules that lower the error rate, whether it has to do with reducing driving accidents, getting men who use public urinals to aim better or enticing people to save for retirement—and do it in a way that makes people themselves happier with the results.

Reading this book made me think of (one version of) the classic story of Jascha Heifetz’s American debut at Carnegie Hall in 1917, when he was 16 years old. At intermission, the violinist Mischa Elman turned to his friend, the pianist Leopold Godowsky, wiped his brow and said, “It’s awfully hot in here!” Godowsky replied, “Not for pianists.” Mr. Thaler’s research doesn’t raise my temperature, but that’s because I am not a traditional economist. Pianists will enjoy this book, but violinists need it.

It is long past time to replace Econs with Humans, both in theory and in the practice of prediction. Mr. Thaler believes that, soon enough, all economists will be “behavioral,” and his field will vanish. But the Econ-oriented theorists who have been major players in (mis)predicting the stock market and consumer behavior will—I predict—continue to resist its message. Psychologists, and Mr. Thaler, know why.

—Ms. Tavris is co-author, with Elliot Aronson, of “Mistakes Were Made (But Not by Me),” forthcoming in a revised edition in the fall of 2015.Popular on WSJ

"even when Mr. Sunstein kept repeating that they were not pro-paternalism but rather “anti-anti-paternalism.”

Means that They, Sunstein, Thaler, were "paternalistic".

That is, behavioral economics can improve economic choices.

A stretch.

I agree completely that over-reaction and attachment to sunk costs are irrational behaviors that are noneconomic and make many predicitions wrong. More rational actors might use such to make money, however, and then sentient beings on the wrong side of markets should use feedback to improve their rational thinking. Is it not fun to write books that claim everyone is wrong but me?

Irrationality of markets provides ammunition for the statists among us, unfortunately, and since it is not a universal principal (there are people who make perfectly good decisions for themselves and families after all), then what occurs in practice is that a central agent makes "good choices" that turn out to be good for some at the expense of others, a la the ACA.

Free markets have a much better track record then command and control economies. Yet totalitarians like Sunstein keep going back to the Marxist well, hoping a new rebranding on rthe same failures will finally work this time.

I am a big fan of Gilder. That said, I'm not fully following his logic here. Will come back to this to post some quotes. This is a long scholarly piece. At the end, out of the blue, he is saying that the world will turn to a de facto gold standard. I think he is also implying that we could save ourselves a lot of heartache and economic damage if we would do that now rather than later.

An easier solution would be to simplify the mission of the Fed and appoint a Federal Reserve board that would competently pursue that mission, namely maintainng a US dollar as stable, as strong and as predictable as gold. Same goes for all other countries and currencies if they want to succeed and prosper.

I believe in buying gold and silver. Even more, I believe in guns, ammo and canned food.

Then if our currency was tied to gold, would you buy and hold money instead? Nothing's perfect in the bunker; canned goods are damaged by freezing and guns can damage with moisture.

(Frustrating that I can't cut and paste from the pdf, but...) Gilder says in effect, with QE and other tampering, money moved from being the neutral medium of exchange to being the message itself. Only if the channel (money) is changeless can the message in the channel [clearly] communicate changes. In 2003, Milton Freidman acknowledged failure of his money supply target theory.

8 canons of Gilder's information theory, slightly shortened and paraphrased:1. The economy is not an incentive system, but an information system. (An odd distinction.)2. Creativity comes as a surprise. Planned economies don't produce it.3. The capitalist economy is not an equilibrium system (static, as taught) but dynamic domains of entrepreneurial activity. 4. Money should be / needs to be - a stable and reliable standard of measure.5. Interference (The Fed, QE, etc.) is noise and makes it impossible to distinguish between content and channel.6. Gyrating currencies are deadly to the commitment of long term enterprise.7. Profits and losses are unexpected outcomes. The real interest rate represents average return.8. Velocity is not a constant, therefore the effective supply of money is not controlled by the central bank but by free decisions made by individuals.

Bonus point, time is the scarce resource.

As Crafty said, serious read. 103 pages, 87 sources cited. All this should be in the monetary thread also.

This summer, a friend sent me a remarkable headline from The Seattle Times: “ ‘Green’ Alliance Opposes Petition to Tax Carbon.”

My initial thought was that this doesn’t make sense. It is like reading “Democrats Rally to Cut the Minimum Wage” or “Republicans Unite to Hike Income Taxes.”

But the political debate in Washington State is a case study about why smart environmental policy is so hard to enact.

First, some background.

Scientists have been telling us for years that the earth is warming and that one of the culprits is human emissions of greenhouse gases like carbon dioxide. Some believe that global warming has contributed to the current severe drought in California.

Sure, there are skeptics about the climate science behind these claims. But science is always a matter of probabilities, not certainties. Even a reasonable skeptic should be willing to embrace modest steps to curb carbon emissions.

Policy wonks like me have long argued that the best way to curb carbon emissions is to put a price on carbon. The cap-and-trade system President Obama advocates is one way to do that. A more direct and less bureaucratic way is to tax carbon. When polled, economists overwhelmingly support the idea.

One reason is that putting a price on carbon alters incentives in many ways. It encourages utilities to switch to cleaner forms of generating electricity, like wind and solar instead of coal. It encourages people to buy more fuel-efficient cars, form car pools with their neighbors, use more public transportation, live closer to work and turn down their thermostats. A regulatory system that tried to achieve all this would be heavy-handed and less effective.

Motivated by this thinking, Washington Carbon, an advocacy group in the state, is now trying to put a carbon tax on the 2016 ballot. Initiative Measure 732 would institute a tax on fossil fuels of $25 a metric ton of carbon dioxide (which translates to about 25 cents a gallon of gasoline).

Most of the revenue from the measure would be used to reduce the state sales tax by one percentage point. A smaller amount would be used to reduce taxes on manufacturing companies and to fund a tax rebate of up to $1,500 for low-income working families. The overall plan is progressive and revenue-neutral. If passed, the initiative would yield a tax shift, not a tax increase.

That is why some environmentalists are opposed. Rather than rebating the money the carbon tax would raise, they want to spend it on environmental and other government programs.

To be sure, a person can favor both a more environmentally friendly tax policy and greater government spending. But there is no good reason to marry these policies. If the goal is to build a political consensus to tackle climate change, there is good reason not to.

The size of government is an issue that divides the political right and the political left, and it will most likely always do so. The same need not be true of climate change.

Bob Inglis, the former Republican congressman from South Carolina, heads the Energy and Enterprise Initiative at George Mason University A recent winner of the John F. Kennedy Profile in Courage Award, which is given to public officials, he has been pushing for climate change solutions that are consistent with free enterprise and limited government.

Environmentalists in the United States would do well to look north at the successes achieved in a Canadian province. In 2008, British Columbia introduced a revenue-neutral carbon tax similar to that being proposed for Washington.

The results of the policy have been what advocates promised. The use of fossil fuels in British Columbia has fallen compared with the rest of Canada. But economic growth has not suffered.

What is most noteworthy, however, is that the policy was championed by a right-of-center government that did not previously have close ties to the environmental movement.

It was a Nixon-goes-to-China moment: Gordon Campbell, British Columbia’s premier, had more credibility by acting against type. Because of the government’s conservative credentials and its commitment to make the policy revenue-neutral, it brought along the crucial support of the business community.

Could such a situation happen in the United States? Right now, it is hard to imagine, as many of the Republicans vying for the presidential nomination pander to the deniers of climate change. But the experience of British Columbia suggests that this attitude could change.

This brings me back to my friend, Yoram Bauman, who sent me that headline. He is an environmental economist and stand-up comedian (yes, an unusual combo). He is also one of the leaders of the effort in Washington State to pass a carbon tax. He has been working tirelessly to build support.

Based on his experiences, he has a message for environmental activists: “I am increasingly convinced that the path to climate action is through the Republican Party. Yes, there are challenges on the right — skepticism about climate science and about tax reform — but those are surmountable with time and effort. The same cannot be said of the challenges on the left: an unyielding desire to tie everything to bigger government, and a willingness to use race and class as political weapons in order to pursue that desire.”

Ego Alert!I have been making exactly this point here on the forum for years now.

Yes. I was going to give you 'credit' in the intro.

"taxing pollution and reducing taxes on good things in equal or greater measure"

Yes and that is what the supposedly conservative author* has in mind too. *former chief economist for Pres. Bush and head of the Harvard Economics dept.

That said, I have a couple of questions...

1) Per GM's follow up, what is the 'external cost' of adding carbon, not pollution, to the atmosphere when the current concentration is .000400, (400 parts per million)? The hard answer after rounding is nothing, right?

2) Per my criticism of the national sales tax, what is the safeguard that after creating this new tax (that will clean up nothing) that the new tax will not be used a) to change behaviors according to bureaucratic preferences and b) to raise the total burden of taxation? The answer is that of course it will be used for arbitrary social engineering and of course it will be used to increase the total tax burden.

Theoretical arguments for new sources of government revenues need to be held up to political realities.

Social security was passed because it was it was a 1% tax on up to 3000 of income, a $30 tax. It was capped to not exceed 3% up to the same maximum making it never more than a $90/year tax, not indexed for inflation or wage levels. http://www.justfacts.com/socialsecurity.asp

Great idea, but FDR's law has nothing to do with the system we have now.

The praise this week for Andy Grove, who died on Monday at age 79, has been wrapped up in praise for Silicon Valley, where he was a towering figure in the semiconductor revolution and the longtime leader of Intel, the world’s biggest supplier of microprocessors.

Lost in the lore is Mr. Grove’s critique of Silicon Valley in an essay he wrote in 2010 in Bloomberg Businessweek. According to Mr. Grove, Silicon Valley was squandering its competitive edge in innovation by failing to propel strong job growth in the United States.

Mr. Grove acknowledged that it was cheaper and thus more profitable for companies to hire workers and build factories in Asia than in the United States. But in his view, those lower Asian costs masked the high price of offshoring as measured by lost jobs and lost expertise. Silicon Valley misjudged the severity of those losses, he wrote, because of a “misplaced faith in the power of start-ups to create U.S. jobs.”

Mr. Grove contrasted the start-up phase of a business, when uses for new technologies are identified, with the scale-up phase, when technology goes from prototype to mass production. Both are important. But only scale-up is an engine for job growth — and scale-up, in general, no longer occurs in the United States. “Without scaling,” he wrote, “we don’t just lose jobs — we lose our hold on new technologies” and “ultimately damage our capacity to innovate.”

And yet, an all-out commitment to American-based manufacturing has not been on the business agenda of Silicon Valley or the political agenda of the United States. That omission, according to Mr. Grove, is a result of another “unquestioned truism”: “that the free market is the best of all economic systems — the freer the better.” To Mr. Grove, that belief was flawed.

The triumph of free-market principles over planned economies in the 20th century, he said, did not make those principles infallible or immutable. There was room for improvement, he argued, for what he called “job-centric” economics and politics. In a job-centric system, job creation would be the nation’s No. 1 objective, with the government setting priorities and arraying the forces necessary to achieve the goal, and with businesses operating not only in their immediate profit interest but also in the interests of “employees, and employees yet to be hired.”

When Mr. Grove wrote his critique, he was concerned about the corrosive social and economic effects of high unemployment, then 9.7 percent nationally. Unemployment has dropped considerably since then, but problems persist. Insecure, low-paying, part-time and dead-end jobs are prevalent. On the campaign trail, large groups of Americans are motivated and manipulated on the basis of real and perceived social and economic inequities.

Conditions have worsened in other ways. In 2010, one of the arguments against Mr. Grove’s critique was that exporting jobs did not matter as long as much of the corporate profits stayed in the United States. But just as American companies have bolstered their profits by exporting jobs, many now do so by shifting profits overseas through tax-avoidance maneuvers.

The result is a high-profit, low-prosperity nation. “All of us in business,” Mr. Grove wrote, “have a responsibility to maintain the industrial base on which we depend and the society whose adaptability — and stability — we may have taken for granted.” Silicon Valley and much of corporate America have yet to live up to that principle.

This is important today. 9 out of 10 economists or news agencies getting this wrong doesn't make wrong right. it wasn't caused by a failure of private businesses. It was caused by a failure of the federal government.

Who is the Milton Friedman today? Besides being brilliant, he explained economic things in a way that everyone can understand and he openly debated anyone.

The above takes about 7 minutes of your life for you to not be wrong about something that caused a decade or more of misery. The wrong lessons learned from the Great Depression are central to the problems we face today.

Is there a more brain-dead concept than to empower the government to fight "income inequality"? What sane, normal, rational human being thinks that human talent, drive, interests and opportunity can -- or should -- result in equal outcomes?

Despite my love of athletics, I knew in third grade that my friend, Keith, could run much faster than I could. For two years I played Little League ball, and I got better at it. But no matter how hard I tried or how many hours I spent, I could not hit, run or throw as well as my friend Benji.

Later in life, I started playing tennis, and I became quite passionate about it. But most of the people I played against had started playing years earlier, and most had taken lessons for years. I got better, but given my competitors' head start, the gap remained.

Financial planners advise clients to start early and stick to some sort of game plan. Is there any wonder that those who do so will have more net worth than those who started later, or who lacked the discipline to follow and stick to a plan? How is government supposed to address these "unequal" outcomes?Most entrepreneurs experience failure before hitting on an idea, concept or business that makes money. Even then, it takes 20 to 30 years of long hours and sacrifice, along with occasional self-doubt and a dollop of luck, to become a multimillionaire.

I recently saw a movie starring Cate Blanchett. She is a very good actress, but she is also strikingly beautiful. Is there any doubt that her good looks, over which she had no control, are a factor in her success? Is it unfair that an equally talented actress, but with plain looks, will likely have an "unequal" career compared with that of Blanchett?

Speaking of acting, most who venture into that field do not become successful, if success is defined as making a living as an actor. These overwhelming odds still do not deter the many young people who flock to Hollywood every year to "make it."

Had a would-be actor dedicated that same drive and personality to some other profession, success would have been more likely, if less enjoyable. Should the government intervene and take from the successful non-actor and give to those who unsuccessfully pursued a long-shot acting career? An ex-actor told me of her recent lunch with a friend she had met when they both left college and pursued acting. While the ex-actor moved on to a different, successful career, her friend stuck to acting, through thick and thin. The actor informed her friend that she recently turned down a commercial. Why? What struggling actor turns down this kind of work? Turns out, through some sort of "assistance" program, said the friend, the state of California is "assisting with her mortgage." She has no obligation to repay the money, and she will continue to receive the assistance as long as her income is not above a certain level. How does this strengthen the economy? The ex-actor, through her taxes, subsidizes the lifestyle of the actor, who admits turning down work lest she be denied the benefits.

But this is exactly the world sought by Bernie Sanders -- a government that taxes the productive and gives to the less productive in order to reduce "income inequality."

In the real world, two individuals, living next door to each other, make different choices about education, careers, spouses, where to live, and if and how to invest. Even if they make exactly the same income, one might live below his or her means, prudently saving money, while the other might choose to regularly buy new cars and fancy clothes and go on expensive vacations. Is there any question that the first person will end up with a higher net worth than the latter? Is their "inequality" something that government should address?

Although Beyoncé is a good singer, is there any question that there are others with superior voices? But Beyoncé is also blessed with "unequally" good looks, charisma and perhaps better management -- maybe better than the other two ladies in her musical trio, Destiny's Child, whom she once sang with. Three singers, in the same group, have had "unequal" outcomes.

Communism, collectivism and socialism rest on the same premise -- that government possesses the kindness, aptitude, judgment and ability to take from some and give to others to achieve "equality." Karl Marx wrote, "From each according to his ability, to each according to his needs." And that's the problem. The statement implicitly acknowledges that some have more aptitude, drive, energy and ability than others. To take from some and give to others reduces the initiative of both the giver and the givee.This is the fundamental flaw with income redistribution, the very foundation of communism, socialism and collectivism. One would think that Bernie Sanders would have figured this out by now. But wisdom among 74-years-olds, like outcome, is not distributed equally.

Lets see. Wikipedia states 27% of population is under 21. That means 73% are over 21 or 225 million if we assume there are 300 million in the US. Giving everyone of those $10,000 comes out to 2.25 trillion dollars.

Did I miss something? Did the article above explain who is going to pay for this?

Of course the answer is the "rich". It always is. Doesn't add up.

His point about less jobs if AI really fulfills it's promise is worth thinking about though.

"First, my big caveat: A UBI will do the good things I claim only if it replaces all other transfer payments and the bureaucracies that oversee them. If the guaranteed income is an add-on to the existing system, it will be as destructive as its critics fear."

"First, my big caveat: A UBI will do the good things I claim only if it replaces all other transfer payments and the bureaucracies that oversee them. If the guaranteed income is an add-on to the existing system, it will be as destructive as its critics fear."

Also, he begins: "Replacing the welfare state with ..."

I oppose a new gigantic program because it WON'T replace all other programs. The politics of this isn't that simple. For example, the left doesn't actually want to solve the problem and the right isn't going to embrace a new $2 trillion program either. Still I like the thought process. We need to find ways to help those in need and reform our basic safety net WITHOUT all the disincentives to produce that we currently put on both the payers and the recipients.

It is a sign of how bad our current system is to know that paying everyone, need it or not, 13k/year is better.

People on the edge of working more and not working for money often face real, marginal tax rates greater than 100%. The Unaffordable Healthcare Act puts all our previous disincentive to work problems on steroids.

"nearly all economists agree that free trade, by expanding the size of the market to enable greater specialization and economies of scale, generates more wealth than any system that restricts cross-border exchange."

- I would like to hear your view on this.

"Consider Apple. By availing itself of lowskilled, low-wage labor in China to produce small plastic components and to assemble its products, Apple may have deprived U.S. workers of the opportunity to perform that low-end function in the supply chain..."

- this is a great, current example. I was going to cut it there and say, we could require US workers to build it and then the number built would be zero as the phones would need to be so expensive. Same point, but they answered it better than I could:

"...But at the same time, that decision enabled iPods and then iPhones and then iPads to be priced within the budgets of a large swath of consumers. Had all of the components been produced and all of the assembly performed in the United States — as President Obama once requested of Steve Jobs — the higher prices would have prevented those devices from becoming quite so ubiquitous, and the incentives for the emergence of spin-off industries, such as apps, accessories, Uber, and AirBnb, would have been muted or absent."

What is the alternative to free trade that works better? Government managed trade? Government targeted trade? We will get tougher on their products and services entering and they won't get tougher on ours? Government will stay benevolent and not be corrupted by cronyism as it picks winners and losers? I don't think so on all counts. ------------------------Smoot Hawley data (Smoot Hawley was not the only factor, but telling IMO): Smoot Hawley raised tariffs on 20,000 items by 6.3% to 19.8%.Imports fell 66%, exports fell 61% GDP fell over 25%.

I'm leaving tomorrow for the three day DBMA Camp in Central PA with Top Dog and Lonely Dog and a proper answer of this would require more time and mental effort that I have today.

Part of the answer has to do with what happens when a hostile fascist state e.g. China, targets certain sectors (e.g. rare earth minerals) for geo-political military considerations. Russian control over Euro natural gas would be another example.

Part of the answer has to do with the predatory pricing of fascist states. Yes in the long run this is unsound, but in the long run we are all dead.

"Part of the answer has to do with what happens when a hostile fascist state e.g. China, targets certain sectors (e.g. rare earth minerals) for geo-political military considerations. Russian control over Euro natural gas would be another example."

"Part of the answer has to do with the predatory pricing of fascist states. Yes in the long run this is unsound, but in the long run we are all dead."

On the first part from my point of view, national security is always a valid reason to interrupt free trade. Freeze assets, cancel purchases, block trade, all are legitimate if national security is the valid reason. But that is the exception and it doesn't mean, from my point of view, that 'managed' trade in general is an acceptable alternative, economically or in terms of liberty, to free trade.

Each of those examples, China rare earth elements and Russia natural gas warfare, are great topics to dive into later when time permits. How do we address those?

On the second part, dealing with fascist states, I guess the same applies. How do we best address that? If we are going to violate our own principles in our trade policies, then our express purpose in a range of policies should be to bring about the end of that fascism and those policies, not to move us in the permanent direction of government managed trade.

I don't buy the premise that China can gain on us by devaluing and under-pricing. Anti-trust violations, copyright theft etc are obvious exceptions to that and should be aggressively dealt with .

One more economics post for today - the previous one is on the Monetary thread.

Walter Heller was my Econ professor at U of MN. He was chief economic adviser to Presidents Kennedy and Johnson, author of the Kennedy tax cuts, the war on poverty and part of the Marshall Plan. A Keynesian. Milton Friedman hopefully needs no introduction. A Monetarist. They each make their case and respond to each other:

"When politicians use bailouts to protect borrowers or lenders from their folly, they just encourage more folly."

- Alan Reynolds on the sub prime mtg market one year before it crashed. Like nearly all economists, he missed predicting the crash, but was grasping the cause. http://townhall.com/columnists/alanreynolds/2007/03/22/subprime_economics

Central planning has been a failure for many years, really all of history.

This post is a keeper. Hard to fully document the failure of central planning without knowing the end of the Roman empire and of the Soviet planners, two very different experiments.

Also note the writing of Ibn Khaldun from the 1300s, The Muqqadimah, noting how government expanding and incentives to produce diminishing ends in collapse. Excerpt in translation:

"In the early stages of the state, taxes are light in their incidence, but fetch in a large revenue...As time passes and kings succeed each other, they lose their tribal habits in favor of more civilized ones. Their needs and exigencies grow...owing to the luxury in which they have been brought up. Hence they impose fresh taxes on their subjects...[and] sharply raise the rate of old taxes to increase their yield...But the effects on business of this rise in taxation make themselves felt. For business men are soon discouraged by the comparison of their profits with the burden of their taxes...Consequently production falls off, and with it the yield of taxation."http://dogbrothers.com/phpBB2/index.php?topic=1023.msg16968#msg16968

Central planning has been a failure for many years, really all of history.

This post is a keeper. Hard to fully document the failure of central planning without knowing the end of the Roman empire and of the Soviet planners, two very different experiments.

Also note the writing of Ibn Khaldun from the 1300s, The Muqqadimah, noting how government expanding and incentives to produce diminishing ends in collapse. Excerpt in translation:

"In the early stages of the state, taxes are light in their incidence, but fetch in a large revenue...As time passes and kings succeed each other, they lose their tribal habits in favor of more civilized ones. Their needs and exigencies grow...owing to the luxury in which they have been brought up. Hence they impose fresh taxes on their subjects...[and] sharply raise the rate of old taxes to increase their yield...But the effects on business of this rise in taxation make themselves felt. For business men are soon discouraged by the comparison of their profits with the burden of their taxes...Consequently production falls off, and with it the yield of taxation."http://dogbrothers.com/phpBB2/index.php?topic=1023.msg16968#msg16968

When our host and moderator says this needs to be posted on both the science and political threads on economics, I believe that makes it REQUIRED READING. )

Good to see more experts weigh in on this. Piketty debunked (again). Inequality is the ladder there for everyone to climb. It isn't a bad thing that people in different careers, at different points in their careers, with different effort levels and different talents get different pay. It's how our most scarce resource, our time, gets allocated best. But it gets measured wrong and then hyped for political and economic folly. I suppose this debate has been going on since Adam and Eve but it restarted in the Bush years as a way of saying a good and growing economy was bad. Mis-measure the differences and then sound the alarm. The point of the deception was to foster dissatisfaction with economic growth and gain support for greater redistribution.

John F Kennedy said a rising tide lifts all boats. He didn't say all boats have to be the same size and travel at the same speed, now matter how small or slow or how vulnerable they would have to be to the next wave.-----------------------------------------------------------------------------------------------

The Inequality HypeNEIL GILBERTThe great devil of progressives turns out to be mainly a figment of accounting. Better data gives us a more heartening picture of American well-being.

For most of the 20th century, poverty represented the root of all evil to Americans—sprouting criminality, violence, hunger, disease, stunted achievement, and premature death. With the tremendous growth of both the economy and the welfare state over the past sixty years, the political campaign against poverty has almost vanished from the public square. Today, many see economic inequality as the root cause of most, if not all, of our social ills. President Obama described it as the defining challenge of our time—one that threatens “the very essence of who we are as a people.”

It should go without saying that poverty and inequality are not the same. However, it’s worth repeating, because over time a conflation of the two has taken root in common perceptions. The evils once associated with poverty have been transferred lock, stock, and barrel to inequality, whether justifiably or not.

Although political efforts to reduce income (and wealth) inequality do not carry the moral force of religious edicts (leaving aside those for whom Das Kapital has assumed biblical status), they have an intuitive moral appeal not dramatically different from appeals to reduce true poverty—again, since both are seen as causing the same cluster of social evils. Long before any exposure to ideas of social justice one typically hears young children yelling “that’s unfair!” when a pie is divided unequally among them; the quickest to complain are invariably those handed the smallest slices.

And why shouldn’t they? All else equal, there seems to be little ethical justification for one child to get a bigger slice of the pie. As adults we usually make peace with reality by recognizing that it is rarely if ever the case that all else is equal. Karl Marx got around this problem by arguing that the secret expression of value, namely that all kinds of human labor are equal and equivalent, because in so far as they are human, labor in general cannot be deciphered until the notion of human equality has acquired the fixity of a popular prejudice.

For Marx, in other words, all human labor has the same value because we are all equal in what he deems people’s most important characteristic—their humanity. This tautological formulation skirts the issue of how, or even whether, to adjust for merit (and of course it famously leaves out every other factor of production in an economy, but never mind about that for now).

Since classical antiquity the balance between merit and equality has animated philosophical debate about what constitutes a just distribution of material goods. Aristotle believed that a fair and just distribution could not ignore merit, which, once taken into consideration, made a fair distribution essentially an unequal one. He qualified the idea that “equal” is just by differentiating between numerical and proportional equality. The former dictates that everyone gets exactly the same basket of goods, while latter prescribes that the amount of goods received by different people be relative to the amount of effort each contributed to their production. With this deft distinction, Gregory Vlastos observes, “the meritarian view of justice paid reluctant homage to the equalitarian view by using the vocabulary of equality to assert the justice of inequality.”1

Still, the case for reducing inequality made in the political arena appeals to the intuitive sense that fair means equal. All that is being asked is that millionaires and billionaires pay their fair share. This leaves aside the meritarian question of whether they legitimately deserve to possess such vast wealth in the first place. For the most part, proposals to advance equality by taxing tycoons evoke little public opposition. Whether or not targeting this group is really just, many argue that the millionaires can easily afford it. Others question how lawfully the super-rich came by their wealth in the first place, and still others, law aside, assert that all wealth distribution systems are based ultimately on coercion, made necessary by the original sin of private property. The merely progressive as opposed to radical case for income redistribution gains added support from the prevailing assumption that economic inequality is inherently bad because it causes stress, low self-esteem, and a whole raft of dubiously medicalized effects. This assumption reflects the growing tendency to conflate the equality of material outcomes with the incontestable fair-mindedness of equal opportunity.

Champions of increasing economic equality have an emotionally compelling argument that ensures the moral high ground for those making the case. It is not an argument that any sensible politician (or aspiring academician, as opposed to a professional gadfly like the Princeton philosophy professor Harry Frankfurt) wants to enter on the other side.2 Thus in contemporary Western political discourse equality is so thoroughly vested as an abstract good that questions are rarely raised about exactly how much economic inequality is unacceptable, how much is fair, or even how much really exists. The next time someone lectures you about the need to increase equality, you might try asking: How much should we have? As much as Sweden, is one likely response. But inequality has been on the rise in Sweden as in most other industrialized countries, so is the acceptable level that of Swedish equality in 1995 or 2016? Now there’s a conversation stopper for you.

Income inequality is at once a palpable and amorphous condition. That some people have more money than others is a tangible reality. But most people have no idea about the actual distribution of income and their position in the population. An analysis of several surveys of ordinary citizens in nearly forty countries reveals widespread misperceptions about the degree of inequality, how it is changing and where they fit in their country’s income distribution. For example, in the countries surveyed an average of 7 percent of respondents owned a car and a second home, yet on average 57 percent of this group thought they belonged in the bottom half of the income distribution. Among low-income respondents receiving public assistance, a majority placed themselves above the bottom 20 percent of their income distribution. These findings raise serious doubts about the extent to which the median voter knows how much she might lose or gain from redistribution. More important, it means that discontent with economic trends has a lot less to do with perceptions of material inequality than it does with a whole host of other factors that are, as it happens, a lot harder to quantify and therefore much less well appreciated by elites.

Metrics of Inequality and Material Well-Being

In contrast to the normative moral appeals and vague calibrations of fairness in political discourse, the quantitative metrics of social science lend a certain precision to estimates of income inequality. However, these empirical estimates and especially what they signify rest on loose soil that offers fertile diggings for economists and philosophers less interested in facts than in changing facts. To really grasp the essential meaning of economic inequality requires examining how income is measured in relation to demographic changes, geographic differences, and shifting fortunes over the life course. But if that interferes with the propagation of a certain ideological position, then these requirements go unrequited. Let’s look more closely at the facts before we deign to tamper with them.

Income inequality in the United States is generally perceived to have increased over the past thirty years. However, the degree and implications of this trend remain in dispute. The disagreement reflects, in part, differences in the way economists measure inequality, which are rarely aired outside of technical publications. Even when the different measures are reported, what they signify is difficult to discern beyond whether the numbers are going up or down.

The most common measures of inequality include the Gini index and a comparison of income quintiles. They vary in convenience and transparency. The Gini index provides an expedient summary ranging from 0 to 1; zero denotes perfect equality of income and 1 represents a distribution in which one member possesses all the society’s income. Among the advanced industrialized countries Gini coefficients range from .250 to .500. By summarizing the dispersion of income in one number, Gini coefficients are useful for comparative purposes. They clearly show whether economic inequality is increasing or decreasing over time and is higher or lower among countries.

However, the numerical precision veils the existential reality of inequality, particularly in a country as large as the United States. That is, the numbers convey an empirical impression that those with an annual income of $100,000 have a higher standard of living than those with an income of $85,000. If this were not the case, why be concerned about income inequality in the first place?

But in fact it is often not the case. The U.S. Bureau of Economic Analysis documents strikingly large differences in the cost of living throughout the country.3 Thus, for example, when regional price differences are factored in, a $100,000 income in New York State is worth less than an $85,000 income in Montana. Some might argue that it is worth the difference to live in New York. Having come from New York City, like many of my friends I once believed that civilization ended on the east bank of the Hudson. Yet people have different preferences for cultural amenities and natural beauty—and different levels of tolerance for traffic, noise, smog, and cramped apartments. Montanans typically refer to their state as “the last best place,” which may explain the influx of wealthy people over the past few decades. Cost-of-living differences are even more extreme among metropolitan areas. The San Francisco Bay area is almost 40 percent more expensive than Rome, Georgia, a charming locale nestled in the foothills of the Appalachians. Since the cost of living is usually higher in states and metropolitan areas where the average household income is above the U.S. median, the Gini coefficient tends to exaggerate differences in the levels of material comfort and well-being implied by economic inequality.

Moreover, despite the suitability of Gini coefficients for comparing levels of income inequality over time and among countries, the findings expressed by these comparisons can obscure their implications for economic well-being. For example, the .378 Gini coefficient for the United States represents a much higher degree of income inequality than the .257 computed for the Slovak Republic. As for economic well-being, a look at how much money is actually available reveals that the Slovak Republic’s median disposable household income amounts to 29 percent of that of the United States.4 Its middle-class would be on welfare here.

Finally, the Gini coefficient lends numerical precision to the assumption that increasing economic equality is a social improvement. Yet during a recession economic equality as measured by the Gini index may well increase in a country where everyone is getting poorer. Earnings fall for people in both the upper and lower income brackets, but the decline is steeper for those at the higher end who have more to lose in the first place. By the same token, a country could experience rising inequality according to its Gini index when everyone is becoming better off. The rich are getting richer as the poor are also getting richer, just not as much. Rising inequality, however, can also signal that the rich are getting absolutely more and the poor are getting absolutely less. But the Gini coefficient metric by itself is powerless to tell you which is which.

So, are the rich getting richer and the poor getting poorer? A 2012 Pew Research Center survey found 76 percent of the public answered “yes,” which was about the same as the 74 percent who held this view in 1987.5 In contrast to the Gini coefficient, which cannot answer the question, the analysis of income quintiles entails a direct examination of how money is distributed among the different groups, revealing the extent to which their incomes are rising or falling. Calculating the financial resources of five groups that range from the top to the bottom 20 percent of the income distribution, this approach illuminates the economic well-being of families and how they fare over time. But here, too, the results vary according to the alternative definitions of income.

Thomas Piketty and Emmanuel Saez’s well-known study of income inequality in the United States, for example, was based on the market income of tax filers.6 According to this definition, from 1979 to 2007 there was a 33 percent decline in the mean income of those in the bottom quintile in contrast to a 33 percent increase among those in the top 20 percent of tax units. Thus, left entirely to its own devices, the market allocation of income generated a pattern of increasing inequality wherein the rich got noticeably richer and the poor got poorer—a bleak testimony, supposedly, to the distributional problem of capitalism.

However as Richard Burkhauser pointed out in his presidential address to the Association for Public Policy Analysis and Management, the market income of a tax unit is a poor indicator of how much money families actually have to live on.7 A more inclusive measure of the income that remains in households after subtracting what they must pay in taxes and adding the money they receive through government transfers transmits a different image of the American experience. Applying these criteria, instead of a decline we see a 32 percent increase in the mean income of the poorest fifth between 1979 and 2007. (Table 1) Overall, this broader measure still reveals a rise in inequality during that period as the mean income of those in the top bracket climbs by 54 percent.8 But it, too, is incomplete.

Along with taxes and transfers, the most authoritative and extensive measure of income also incorporates capital gains. Along with Burkhauser and his colleagues, the nonpartisan Congressional Budget Office (CBO) agrees that a comprehensive definition involves the sum of market income adjusted for taxes, household size, cash and in-kind transfers, and capital gains.9 However, the consensus unravels over the issue of exactly how to value capital gains. The basic choice is whether to focus on the total taxable gains realized in the year capital assets are sold or the annual change in value of capital assets whether or not they are sold. This is not just a matter of bookkeeping. The choice to include either realized or accrued capital gains in the calculation of annual income has a considerable impact on the rates of inequality.

The CBO favors the use of realized capital gains that are reported on tax returns. After factoring in the impact of taxes, capital gains, and government transfers the CBO data reveal a sharp decline in inequality compared to when it is measured solely by market income. According to these figures, between 1979 and 2010 the household income in the bottom quintile increased by 49 percent, the income in the middle three quintiles increased on average by 40 percent, and those in the highest bracket increased by 71 percent.10 While incomes increased across the board, the largest gains registered on the two ends of the income distribution. These findings temper progressive arguments that focus on the increasing inequality of market incomes to demonstrate the need for greater social welfare spending.

The income measures cited above all indicate a rising level of inequality that varies only in the rate at which it seems to have increased over the past three decades. In contrast, a different picture emerges if accrued capital gains, which include housing, are substituted for realized taxable gains. This approach yields a reversal of income trends between 1989 and 2007, which shows a decline in inequality as the household income in the bottom quintile climbed at a rate considerably higher than the increase experienced in the top quintile, which was hit much harder by the housing market crash in 2007. Needless to say, the choice between these methods of valuing capital gains is highly contested.

Every pertinent measure of income quintiles, especially the widely acknowledged comprehensive assessment by the CBO, dispels the notion that within the United States over the past three decades the rich have been getting richer as the poor have gotten poorer. The CBO measure reveals that from the highest to the lowest quintile, the mean household income of every group was lifted, even amid a rising tide of inequality. Among the bottom fifth the mean income increased by 49 percent. That’s not peanuts, particularly when we recognize what else is happening.

Another Dimension: Looking Within the Groups

Although the analyses of change since 1979 illustrate the extent to which household incomes climbed while the gap between the bottom and top fifths widened, it’s a one-dimensional picture that discounts what was happening within these economic bands. This image conveys a static impression that the same households within each quintile were experiencing these changes over time. In truth, a lot more was going on among the households within these five divisions, the particulars of which lend depth to the one-dimensional story of increasing economic inequality.

To grasp the full implication of rising inequality in household income, it is important to recognize that during the period in question young workers were continually entering the labor force as the older generation retired and died. A 25 year old who began working in 1979 while living on his own with an income in the bottom 20 percent would very likely reach a higher bracket by the time he was 53 years old in 2007. So not only did entry-level income rise between 1979 and 2007, but over the course of time many of those who started out at the bottom climbed toward the top. In just the period from 1996 to 2005, for example, the U.S. Treasury Department estimates that about half of the taxpayers starting in the bottom 20 percent moved into a higher income bracket.11 Of course, we do not know how many members of this upwardly mobile group were young scions spending their first year out of Princeton as shipping clerks in their fathers’ factory, serving Teach for America in a poor rural area or lolling lazily on the Left Bank—a reminder that numbers can impose a surface on patterns that shields us from the underlying reality.

There is even more to this story. As time passed, the 25 year old got married and had two children. Thus, what started in 1979 as a single-person household in the bottom fifth of the income distribution had morphed into a middle-income household with four people by 2007. This change illustrates an important characteristic of the income quintiles. Although they represent five groups with an equal number of households, the average number of persons per household within these groups varies as do other characteristics such as family structure and employment. The top fifth of households contain 82 percent more people than the bottom fifth. The proportion of married couples in each group ranges from 17 percent in the lowest income quintile to 78 percent in the highest. At the same time, single men and women living alone account for 56 percent of the households in the bottom fifth, but only 7 percent among the top group. And no one was employed in more than 60 percent of the households in the bottom quintile; while 75 percent of the households in the top quintile had two or more earners.

Taking account of the household characteristics within each quintile reveals that to some extent the increasing level of income inequality since 1979 coincides with the changing demographics of family life, particularly the smaller number of persons per household, the decreasing rate at which couples form and maintain stable marriages, and the increasing number of two-earner households. On that score, W. Bradford Wilcox and Robert I. Lerman estimate that 32 percent of the growth in family income inequality since 1979 is linked to the retreat from marriage and the decline of stable family life.12 The point, again, is that economic data are not self-interpreting, and that without a relevant sociological filter they can be made to mean almost anything except what they actually mean.

Concentrating on advances within just the top quintile offers a different perspective, which sharpens our understanding of what is behind the rising level of economic inequality in recent years. Two prominent findings based on the CBO’s all-inclusive measure of income tell the story: From 1979 to 2010 the after-tax income of the top 1 percent increased by 201 percent (compared to the 49 percent increase for households in the bottom quintile and the 65 percent increase for those in the 81st to 99th quintile).13 Research focused on the pre-tax market income of the top 1 percent generates an even higher level of inequality than the CBO findings.

Thus, a disproportionate degree of the increasing level of inequality was due to significant financial gains made by those at the apex of the income pyramid. As for the rest, a careful analysis matching data from the U.S. Census Bureau and Internal Revenue Service demonstrates that after 1993 there was no palpable increase of inequality among the bottom 99 percent of the population. Since the pre-tax incomes of the top 1 percent started at $388,905 in 2011, many of these families would not be considered the super-rich. It’s around the top one-tenth of 1 percent, where pre-tax incomes start at $1,717,675, that we begin to cross the line between relatively well-off and truly affluent.

As soon as the conversation on inequality begins to concentrate on the wealthiest households, the question increasingly comes to mind: What do these people do to deserve such immense rewards? A 2013 study commissioned by the New York Times discloses a median executive pay of $13.9 million among the CEOs of 100 major firms, described by one journalist as a “new class of aristocrat.”14 Although not terribly harsh, this description connotes a privileged class renowned more for its leisure pursuits than its productive labor. But it does suggest how easily personalizing the numbers can transform a dispassionate report on the top 1 percent into bitter accounts of debauchery and corporate corruption. The likes of Bernie Madoff, Tyco’s Dennis Kozlowski, and Ken Lay of Enron supply no shortage of infamy on which to justify a denial of merit. But then there are the brilliant hard-working multi-millionaires who created Apple, Google, and Microsoft, not to mention our favorite movie stars and athletes. Even here some might question why grown men should receive immense sums of money to stand around a few afternoons a week waiting for a chance to hit a ball with a big stick. Major League baseball players were paid on average $3.39 million in 2013. In contrast, for the same activity most minor league players earned between $2,500 and $7,000 for a five-month season—talk about inequality!

Like it or not, in a capitalist system the criterion for reward is ultimately associated with what the market will bear. Of course, many people doubt just how well this standard works in practice. They wonder, for example, how difficult it might be to replace a CEO earning $20 million a year with an equally qualified executive who would accept half that salary. Also, market demand is no guarantee of social value or cultural enlightenment. A writer’s worth varies by the number of readers willing to plunk down the price of a book, regardless of how crass or meaningless the content. Alas, Fifty Shades of Gray has earned millions, while my publishers will be fortunate to clear the all-too-modest advance awarded for Never Enough: Capitalism and the Progressive Spirit. What the market will bear is certainly an imperfect calibration, but most people still think it preferable to having the standard set by bureaucratic quotas or political bargains, though both are often in play, as well.

How Has the Middle Class Really Fared?

Politicians on both sides of the aisle contend that the middle class is being crushed by inequality and diminishing income. But with household incomes increasing amid rising inequality, what do the facts tell us about the real material state of the middle class? There are several ways to answer this question, depending on how the middle class is defined and the benchmarks against which its progress and well-being are measured. The historical absence of an aristocracy has bred a fluid sense of social class and a democratic ethos that instills a degree of reluctance in Americans to identify as “upper class.” Thus, the middle class is a well-regarded, if ill-defined, status to which most Americans subscribe. It is typically associated with one’s income, education, and occupation. Numerous polls capture the propensity of Americans to identify themselves as somewhere along the spectrum of lower-middle to upper-middle class.

When policymakers and the media talk about the middle class, however, it is usually defined by economic divisions. Estimates vary regarding the range of income that delineates the middle class, as well as the interpretation of how the economic fortunes of this group have changed over time. Thus, reviewing the same Census Bureau data the New York Times decries, “Middle Class Shrinks Further as More Fall Out Instead of Climbing Up,” while ten days later the Pew Research Center announces, “America’s ‘Middle’ Holds Its Ground After the Great Recession.”15 Both of these captions are correct and neither highlights the larger story in the data, which only underscores how those who write the headlines may parse the numbers to express the points they wish to publicize. The economic definitions of the middle class in these reports differ: $35,000-$100,000 in the New York Times and $40,667-$122,000 in the Pew study. But the findings are very similar. Both show a substantial contraction of about 10 percent in the size of the middle class, which started shrinking around 1970. Though it sounds ominous, this decline is not necessarily a distressing trend. It depends on where those who were squeezed out of the middle class ended up. If they all moved into the upper income brackets, everyone’s better off.

So where did they go? The answer hinges on the years in question. The New York Times headline focused on the period from 2000 to 2013, the decade of the Great Recession during which the middle class declined by around 2 percent, the upper-income group also declined by about 3 percent, and the lower-income group increased. The Pew caption referred to the period from 2010 to 2013, just after the Great Recession. Over this interval the size of the middle class remained stable, and there was even a small uptick in the upper-income group and a slight decline in the lower-income group.

Despite the fluctuation of a few percentage points during the Great Recession, the larger story in the New York Times report is that between 1967 and 2013 both the lower-income and the middle-income groups contracted while the size of the upper-income group expanded by 15 percent. From this perspective the shrinking of the middle class (and of those in the lower-income bracket) is directly connected to a significant advance in economic well-being as the combined size of the middle- and upper-income groups grew by 5 percent.

Thus, while the New York Times headline evoked a disheartening picture of middle-class decline, the data easily yield a more promising interpretation of the middle-class experience since 1970. The Pew findings offer a somewhat different conclusion, in part because the middle-class definition was pegged at a higher level of income. Although the middle-income group fell by 10 percent, about 6 percent of those who left had climbed into the upper-income category. What a way to go.

Of course, there are other benchmarks against which to evaluate the economic progress and status of the U.S. middle class. Certainly, those concerned about inequality would judge that the middle class has not fared very well in comparison to the income gains realized by the country’s top 1 percent. True; but consider everyone else on the planet. The U.S. middle class boasts among the highest disposable household incomes in the world. The average U.S. family has 38 percent more disposable household income than a family in Italy, 25 percent more than a family in France, and 20 percent more than a household in Germany, when adjusted for differences in purchasing power. (Of course, that doesn’t take fully into account the more efficient provision of many services in Western Europe via the public route: think health care, for example. Which only confirms the point that numbers alone cannot really tell us very much.)

Although some academics invest considerable intellectual energy in debating how to quantify inequality and the significance of change in measures such as the Gini coefficient, most members of the middle class have no idea whether this index is going up or down unless they read about it in the news. And even then the average middle-class citizen is more interested in how much money remains for her family to live on after the give and take of government taxes and transfers than whether or not the Gini index rose or fell by three-tenths of a point.

Could We Ask for More?

Several issues have so far been raised about the divergent approaches to the measurement of inequality, the disparate characteristics of those in different income brackets, the absence of cost-of-living adjustments, the plight of the middle class, the soaring 1 percent, and the sobering revelation of international comparisons. On the whole these issues enable us not so much to dismiss concerns about rising economic inequality as to calm public apprehensions about its rate, degree, and implications. The disparities related to the changing distribution of income in the United States look a lot more acute before taxes and benefits are taken into account, for example—are you listening, Dr. Piketty? As such it can be said that the capitalist market generates and the welfare state mitigates inequality.

Recounted in its most auspicious light, the story of this interaction over the past three decades reveals that while inequality increased, so did household incomes at every level. Measured by disposable household income the U.S. standard of living is among the highest of all the advanced industrial democracies, not to mention the rest of the world. Indeed, reflecting on the rest of the world, Tyler Cowen urges us to preface all discussions of inequality with a reminder that although economic inequality has been increasing in advanced industrialized nations, over the past two decades global inequality has been falling.16 And given global economic patterns, this is not a coincidence but a relationship.

Of course, in an ideal world everyone would have been even better off if the top 1 percent had taken home less than 13 percent of all the income and the bottom 20 percent had gained more—even while the economy grew at the same overall rate. Not to promote the best as an enemy of the good, there is nevertheless a convincing case to be made for social reforms that would to some degree shift the distribution of income away from the top. Progressives and conservatives generally agree on the need to rein in government transfers received by wealthy citizens, particularly the special benefits derived from the favorable tax treatment afforded to homeowners. These benefits, known as “tax expenditures,” allow home owners to deduct the interest paid on mortgages and to net up to $500,000 of capital gains tax-free on the sale of their homes.

The amounts are not trivial. The CBO estimates that the tax expenditures for mortgage-interest deductions amount to $70 billion, almost 73 percent of which goes to households in the top 20 percent of the income distribution, while those in bottom 20 percent receive no benefit. Although there would be some downside for the home-building industry, limiting tax subsidies to wealthy homeowners could lower the level of inequality without seriously adverse consequences for the rate of homeownership.

Yet even if these adjustments were made, much income inequality would still remain, which takes us back to the question: Could we ask for still more? Obviously, there are many ways for government to appropriate additional money from those in the upper-income brackets and deliver more to those on the bottom. Raising income taxes, lifting the ceiling on taxable income for Social Security, increasing the Earned Income Tax Credit and eliminating its marriage penalties, boosting the minimum wage, means-testing Social Security benefits, and taxing the fringe benefits of employment are among the evident alternatives. Then there are the less well-recognized but hardly trivial proposals to tax some classes of advertising and to eliminate the corporate income tax altogether in the context of comprehensive tax reform. Progressives and conservatives argue about whether any and all such measures would kill jobs or boost the economy, discourage work or stimulate activity, generate class conflict or enhance social solidarity, and advance social justice or deny the just deserts of individual merit. A vast literature on these issues has generated mixed findings about the implications of various measures.

Considering the uncertainty surrounding these issues, the degree of support for additional measures to spread the nation’s wealth is heavily influenced by one’s answer to the question: How serious is the problem of rising economic inequality amid abundance? The answer rests on competing ideas about the current state of material well-being in the United States, the integrity of free-market capitalism and, above all, the putative consequences of inequality.

Progressives tend to think that inequality is the story and that, as already noted, nearly everything wrong in U.S. society stems from it. But this argument ultimately depends on presumed maladies arising from inequality that more than stretch scientific criteria for medical causality. The evils ascribed to inequality expand roughly at the same rate as the DSM manual, and that is a suspicious thing.

As long as household incomes are increasing at every level (as measured by the CBO), conservatives are less concerned about rising economic inequality than progressives. They accept inequality as the tribute that equality of opportunity grants to merit, productivity, and luck in the free market, recognizing that this transaction is sometimes distorted by discrimination, exploitation, corruption, and outright larceny, which need to be checked by government. With the average family’s disposable household income in the United States among the highest in the world, inequality is perceived less as a source of social friction between the “haves and the have-nots” than as an imbalance between those who have a lot and others who have even more. This, on balance and seen in an historical perspective, ought to be a cause for celebration, not an occasion for mass self-flagellation.

8Philip Armour, Richard V. Burkhauser, and Jeff Larrimore, “Deconstructing Income and Income Inequality Measures: A Crosswalk from Market Income to Comprehensive Income,” American Economic Review (May 2013). The government transfers included here involve both cash and in-kind benefits, specifically food stamps, housing subsidies, and school lunches, but not the value of employer- and government-provided health insurance. For an analysis of the income growth when cash transfers and health insurance are included, but not in-kind benefits, see Richard Burkhauser, Jeff Larrimore, and Kosali Simon, “A ‘Second Opinion’ on the Economic Health of the American Middle Class,” National Tax Journal (March 2012), pp. 7-32.

9Congressional Budget Office, The Distribution of Household Income and Federal Taxes, 2008 and 2009 (Government Printing Office, 2012). The major components of income included here differ from those recommended by the Canberra Group mainly in regard to capital gains, which the Canberra guidelines exclude from the measure of household income in favor of their treatment as changes in net worth.

11U.S. Treasury Department, Income Mobility in the U.S. from 1996 to 2005 (Government Printing Office, 2007). A similar rate of mobility was reported for those in the bottom quintile from 1986 to 1996. Unlike the CBO measure, these findings are based on pre-tax market income plus cash but not tax-exempt or in-kind transfers. Also, the unit of analysis is not adjusted for household size.

13The Distribution of Household Income and Federal Taxes, 2010. In 2010 the top 1 percent netted almost 13 percent of all the after tax income (15 percent before taxes).

14Peter Eavis, “Invasion of the Supersalaries,” New York Times, April 13, 2014.

15Dionne Searcey & Robert Gebeloffjan, “Middle Class Shrinks Further as More Fall Out Instead of Climbing Up,” New York Times, January 25, 2015. Rakesh Kochhar & Richard Fry, “America’s ‘Middle’ Holds Its Ground After the Great Recession,” Pew Research Center, February 4, 2015.

16Cowen, “Income Inequality Is Not Rising Globally. It’s Falling,” New York Times, July 19, 2014.

Neil Gilbert is Chernin Professor of Social Welfare at the University of California, Berkeley. This essay is adapted from his latest book, Never Enough: Capitalism and the Progressive Spirit (Oxford University Press, forthcoming3

In 1930, Pluto was declared the ninth planet. In 2007, it was demoted to "dwarf planet" status by astronomers after considering new evidence. There are now only eight planets.

Also in the 1930s, the ideas of John Maynard Keynes came of age. In spite of a massive amount of evidence that these ideas don't work, unlike astronomers, economists won't demote Keynes's theories to the dustbin of history.

This isn't that surprising. Whether Pluto is a planet, or not, doesn't impact politicians, or their constituents. If it did, Pluto might still be categorized as a planet.

Keynes thought a free market economy should be managed: in fact, needed to be managed. His ideas flourished in the 1930s when the US was in the Great Depression. Keynes believed that a lack of consumer demand was the culprit to economic problems and government should spend to boost jobs and economic activity.

To this day, in the name of Keynes, economists and politicians support stimulus spending, unemployment benefits, minimum wages, and the redistribution of income.

Not only do politicians and bureaucrats get to increase the size of their budgets and take credit for benefiting constituents, but they get to do it in the name of helping the overall economy. They do it in the name of Keynesian economic theory.

But there is no evidence it has worked. Keynes's theories, as mentioned earlier, have been around for over 80 years. Countries all over the world have tried them. Government budgets have increased dramatically.

This spending encompasses food stamps, welfare, unemployment benefits, Social Security, Medicare, Medicaid, ethanol, solar, wind, and electric vehicle subsidies. State and local governments have boosted the minimum wage and created special subsidies and income support for citizens. Other countries have single-payer healthcare systems and even bigger budgets relative to GDP than the United States.

But there is no economic nirvana anywhere. After 80 years of growth in government, and little economic growth to show for it, doesn't anyone think we ought to stop and question the underlying assumptions that support these Keynesian policies?

Since the current expansion started, U.S. real GDP has expanded at just a 2.1% annualized rate. At the same time government spending, tax rates and regulation have increased. These government burdens reduce entrepreneurial activity, jobs, income growth and push companies out of the U.S.

But many ignore this correlation between bigger government and slower growth. Instead of blaming government there are endless non-government excuses for slow growth. Some blame demographics and some blame weak investment by companies. Other explanations include income inequality, foreign trade, the residual effects of the financial crisis, or government debt levels (which result from low tax receipts.)

All of these explanations shift the blame to the private sector for slow growth and support Keynesian, big-government policy. Unfortunately, government is funded by taxing incomes and profits of business activity or borrowing the wealth generated by that activity. It's true that government can help create a positive environment for business, by, for example, enforcing the rule of law and contracts. But the U.S. long ago surpassed the pro-growth level of spending.

The point is government doesn't create wealth. The private sector does. No matter what Keynesian theories say, it's a truth politicians and bureaucrats don't find very appealing.

Thanks Crafty. What I mean by required reading, income inequality is the heart of the 'progressive' economic view, like opposing the law of gravity. If you aren't ready to answer and challenge them on it, you have lost the argument.

A short snippet from a long piece, "is the acceptable level [of income inequality] that of Swedish equality in 1995 or 2016? Now there’s a conversation stopper for you."

From a liberal point of view, what they're doing in Sweden isn't working either.

People who are invested in the economy are always more likely to benefit from its upturns than people that aren't. Therefore we should oppose significant economic growth?----------------------------------

Nice piece by BW. The last election will be good for our Wesbury discussions. Watching his optimism under Obama was painful, even if he was right that big equities did well in that slow growth environment and no big crash came during that time. Now we can all realistically discuss good policy choices instead of guessing how resilient our economy will be to bad policies.

Self-driving truck technology for travel on interstate highways, based on artificial intelligence, is already technically feasible. Today, about five million drivers are employed in the industry. A 20 percent reduction in this work force over the next 15 years would equate to a million lost jobs. Credit Tony Avelar/Associated Press

I am concerned that my childhood dreams may turn into a nightmare.

Stanley Kubrick’s “2001: A Space Odyssey,” which I first saw in 1968 at seven years of age, sparked my fascination with computers and artificial intelligence, and I have since focused my academic studies and career pursuits within this area.

Fast-forward to today. I still believe that A.I. and automation can keep bringing good to the world. Its effects on middle-skill workers, in America’s industrial Midwest and elsewhere, however, worry me.

It has been suggested that the significant job loss and career destruction illuminated by the 2016 presidential election are a result of bad trade deals and corporate greed. I disagree. It’s much more likely a result of computers, including significant advances in A.I., which have allowed us to optimize our economy as never before. Already, they have permitted the global economy to function as if it were in your backyard. In the next decade, they will take over a vast array of routine work, in new industries, affecting even more workers.

The economic dislocations that computers and artificial intelligence have unleashed have been vastly underestimated. And we are just in the early days.

Think about commercial trucking in America. A.I.-based self-driving truck technology for travel on interstate highways is already technically feasible. Today, about five million drivers are employed in this industry. Even a 20 percent reduction in this work force over the next 15 years equates to a million lost jobs.

One of capitalism’s bedrock promises — one that dates back to Adam Smith — is that competition in the free market benefits society at large. Somewhere along the line, intoxication with efficiency caused us to lose sight of that principle at the expense of workers. Getting back to that promise will require policy changes and a renewal of forgotten values.

The raw, widespread anger we saw during the recent election — and the unexpected swing of several industrial states from reliably blue to red — reflects in large part the intense despair that many middle-skill workers feel as they see their families’ economic prospects fade and social conditions deteriorate.

Trade and immigration have become boogeymen, while technological advances and the huge efficiency gains they bring truly underpin the “hollowing out” of the middle class behind the scenes. Industrial automation has been displacing workers for decades — particularly those doing repetitive, lower-skill work.

Exponential gains in computing power, along with innovations in software, analytical techniques and the rise of Big Data, mean that many white-collar occupations are due for disruption by machines too. According to a 2013 study by two Oxford University professors, almost half of all jobs in the United States are susceptible to “computerization” over the coming decade or two.

With so many at risk of being pushed aside by Smith’s invisible hand, no one should be surprised if people decide to push back. Unless we change course now, we can expect many more Everytowns to become Allentowns.

While the phenomenon I describe is understood by academics and technocrats and, more important, keenly felt by millions of Americans, no one seems to know how to fix this. As Harvard’s Clayton Christensen and Derek van Bever argue in “The Capitalist’s Dilemma,” orthodox finance dictates that investment by corporations to create jobs tends to be the third-best option behind substitutive innovation (which tends not to create new jobs) and efficiency innovation (which almost always results in job losses). As we have seen, companies today increasingly prefer not to employ humans, if possible.

What’s the answer? Most of the commonly proposed fixes are unlikely to resolve the issue. For example, an increasing focus on education, while necessary (the number of American college graduates falls short of labor demand by about 300,000 annually), is not sufficient; what good is a college degree if there are no opportunities to use it? The same could be asked of worker retraining programs.

Some promote the promise of the so-called gig or sharing economy — flexibility! convenience! — but I don’t buy it. Working as an Uber driver might help make ends meet in the short term, but the experience actually causes skills to atrophy over time. When I speak of jobs being lost or saved, what I really mean is careers: the kind of work that provides skill development, meaningful wage growth prospects and a reasonable likelihood that one’s work won’t be automated away. The types of careers, in other words, that have traditionally formed the foundation of healthy communities.

Some argue that history teaches us not to worry: The Industrial Revolution was disruptive, but it created jobs eventually, didn’t it? Sure. Will the Information Revolution do the same? Nobody knows. Creative destruction has become a hallowed concept in the American boardroom, but let’s be honest: Not all destruction is creative in the Schumpeterian sense. As we are seeing, it might just create a wasteland where middle-class communities once thrived.

Mr. Christensen and Mr. van Bever suggest rebooting the capitalist system through a series of policy incentives aimed at making investment capital more “patient,” evolving the curriculums at business schools, realigning corporate strategy and resource allocation and freeing managers to focus on long-term value creation.

These ideas are worthy of support. I would go further and recommend aligning corporate tax policy with the goal of creating and fostering careers by skewing tax rates to favor businesses that create opportunities meeting the criteria described above (skill development, wage growth and resistance to automation).

Given the nature of the problem we face, companies able to create careers through innovation should reap significantly greater policy rewards than companies focused primarily on driving down costs — and eliminating careers.

And business leaders must wake up to the scope and difficulty of the challenges we face. It’s going to require a shift in values. The hollowing out of the middle-skill work force is a classic tragedy of the commons, and few in leadership positions today feel a personal responsibility to help address it. Unfortunately, the true costs associated with the upheaval have thus far been borne not by those in the C-suite, but predominantly by the hard-pressed American worker.

A narrow emphasis on efficiency puts our entire system at risk. Moving forward, creating careers (rather than dead-end jobs) must be an equally valid goal. We cannot and should not try to stop the march of technological progress. But we have to redefine what progress really means.

But how does it produce such wealth? Some have said freedom is the magic potion – that left to their own devices, free people will outperform any other economic system.

That is true, but the ultimate reason is deeper and firmly based in science and fact. In the past few decades, a great deal of research has been done on what is called swarm intelligence. Swarm intelligence attempts to explain and understand the collective behavior of group animals. Think of honeybees, schools of fish, herds of bison, flocks of birds, etc.

The intelligence of the swarm is a significant multiplier. Rather than relying solely on individual intelligence, these groups create a collective intelligence that is orders of magnitudes beyond that of any individual member.

They do so without any leader, with no management of any sort, with no one "seeing the big picture." In fact, having no one in charge is a key ingredient to swarm intelligence. This incredible increase in intelligence is driven by countless interactions among individual members, with each following simple rules of thumb and reacting to their local environment and those members around them. That's it.

Perhaps counterintuitively, if an individual member did attempt to become a leader, the group intelligence would drop precipitously. And although it may be difficult to grasp, this self-organizing behavior has no cause and effect. It simply is.

Think of the intelligence of one of the members of these swarms versus the intelligence of the group. We are talking about not adding a few group I.Q. points, but rather increases in intelligence by orders of magnitude.

My hypothesis is this same process is the scientific basis for the success of capitalism, and in fact the success of the human race. This swarm intelligence has always been at work, but with our highly developed communication skills and the ability to record and store knowledge our collective swarm intelligence is truly astounding. Just like the honeybee, our swarm is orders of magnitude more intelligent than even the brightest among us.

And thus capitalism, which is just individual freedom as expressed in an economic system, is absolutely certain to "work." It is a scientific fact just as certain as gravity. And just like the swarm, it does so with no leader, no management, and no one seeing the big picture – no cause and effect. It just is.

And just like the swarm, when we attempt to place leaders in this process, the collective intelligence plummets. This explains why governments and their activities are always going to be far stupider than free individuals going about their daily lives. This isn't a political statement, but a factual one.

Again, we aren't talking about knocking off a couple group I.Q. points, but rather magnitudinal increases in stupidity. This stupidity multiplier isn't restricted to governments; it applies to all organizations, the larger the worse. Anyone who has worked in government, the military, or other large organizations has seen it every day.

Some economists have noted that during the Soviet Union's existence, the central planners had to daily determine the prices of literally hundreds of thousands of things, and thus the system was terribly inefficient, as they had no way to accurately determine this. My hypothesis is that even if they could have accurately determined each and every one of those prices, they still would have failed. The stupidity multiplier of their command-and-control economy ensured this.

The science on this is clear. If we want to maximize our collective well-being and wealth, if we want to maximize our freedom, if we want to maximize our collective odds for survival, we must allow human swarm intelligence to do its magic. And governments are not the solution, but are rather the destroyer.

John Conlin is an expert in organizational design and change. He also holds a B.S. in Earth sciences and an MBA and is the founder and president of E.I.C. Enterprises, www.eicenterprises.org, a 501(c)(3) non-profit dedicated to spreading the truth here and around the world, primarily through K-12 education.

The economic system called capitalism has been described in many ways, but at its core, it is quite simply free people freely interacting with other free people. Capitalism has transformed the world by producing more wealth than any other economic system in the history of civilization.

But how does it produce such wealth? Some have said freedom is the magic potion – that left to their own devices, free people will outperform any other economic system.

That is true, but the ultimate reason is deeper and firmly based in science and fact. In the past few decades, a great deal of research has been done on what is called swarm intelligence. Swarm intelligence attempts to explain and understand the collective behavior of group animals. Think of honeybees, schools of fish, herds of bison, flocks of birds, etc.

The intelligence of the swarm is a significant multiplier. Rather than relying solely on individual intelligence, these groups create a collective intelligence that is orders of magnitudes beyond that of any individual member.

They do so without any leader, with no management of any sort, with no one "seeing the big picture." In fact, having no one in charge is a key ingredient to swarm intelligence. This incredible increase in intelligence is driven by countless interactions among individual members, with each following simple rules of thumb and reacting to their local environment and those members around them. That's it.

Perhaps counterintuitively, if an individual member did attempt to become a leader, the group intelligence would drop precipitously. And although it may be difficult to grasp, this self-organizing behavior has no cause and effect. It simply is.

Think of the intelligence of one of the members of these swarms versus the intelligence of the group. We are talking about not adding a few group I.Q. points, but rather increases in intelligence by orders of magnitude.

My hypothesis is this same process is the scientific basis for the success of capitalism, and in fact the success of the human race. This swarm intelligence has always been at work, but with our highly developed communication skills and the ability to record and store knowledge our collective swarm intelligence is truly astounding. Just like the honeybee, our swarm is orders of magnitude more intelligent than even the brightest among us.

And thus capitalism, which is just individual freedom as expressed in an economic system, is absolutely certain to "work." It is a scientific fact just as certain as gravity. And just like the swarm, it does so with no leader, no management, and no one seeing the big picture – no cause and effect. It just is.

And just like the swarm, when we attempt to place leaders in this process, the collective intelligence plummets. This explains why governments and their activities are always going to be far stupider than free individuals going about their daily lives. This isn't a political statement, but a factual one.

Again, we aren't talking about knocking off a couple group I.Q. points, but rather magnitudinal increases in stupidity. This stupidity multiplier isn't restricted to governments; it applies to all organizations, the larger the worse. Anyone who has worked in government, the military, or other large organizations has seen it every day.

Some economists have noted that during the Soviet Union's existence, the central planners had to daily determine the prices of literally hundreds of thousands of things, and thus the system was terribly inefficient, as they had no way to accurately determine this. My hypothesis is that even if they could have accurately determined each and every one of those prices, they still would have failed. The stupidity multiplier of their command-and-control economy ensured this.

The science on this is clear. If we want to maximize our collective well-being and wealth, if we want to maximize our freedom, if we want to maximize our collective odds for survival, we must allow human swarm intelligence to do its magic. And governments are not the solution, but are rather the destroyer.

U2 frontman Bono, who is also an investor, philanthropist, and Christian told students at Georgetown University that real economic growth, not government aid, is what lifts people and countries out of poverty long-term, emphasizing that "entrepreneurial capitalism" is the key to prosperity.

“Some of Africa is rising, and some of Africa is stuck," said Bono while speaking at Georgetown's McDonough School of Business to about 700 students. "The question is whether the rising bit will pull the rest of Africa up, or whether the other Africa will weigh the continent down. Which will it be? The stakes here aren’t just about them."

"Imagine for a second this last global recession [in 2007-2009] but without the economic growth of China and India, without the hundreds of millions of newly minted middle class folks who now buy American and European goods – imagine that," said Bono. "Think about the last 5 years."

Then, holding his forehead with his right hand, Bono, who has an estimated wealth of $600 million, said, "Rock star preaches capitalism—wow. Sometimes I hear myself and I just cannot believe it."

"But commerce is real," he said. "That’s what you’re about here. It’s real. Aid is just a stop-gap. Commerce, entrepreneurial capitalism takes more people out of poverty than aid -- of course, we know that.”

U2 frontman Bono, who is also an investor, philanthropist, and Christian told students at Georgetown University that real economic growth, not government aid, is what lifts people and countries out of poverty long-term, emphasizing that "entrepreneurial capitalism" is the key to prosperity.

“Some of Africa is rising, and some of Africa is stuck," said Bono while speaking at Georgetown's McDonough School of Business to about 700 students. "The question is whether the rising bit will pull the rest of Africa up, or whether the other Africa will weigh the continent down. Which will it be? The stakes here aren’t just about them."

"Imagine for a second this last global recession [in 2007-2009] but without the economic growth of China and India, without the hundreds of millions of newly minted middle class folks who now buy American and European goods – imagine that," said Bono. "Think about the last 5 years."

Then, holding his forehead with his right hand, Bono, who has an estimated wealth of $600 million, said, "Rock star preaches capitalism—wow. Sometimes I hear myself and I just cannot believe it."

"But commerce is real," he said. "That’s what you’re about here. It’s real. Aid is just a stop-gap. Commerce, entrepreneurial capitalism takes more people out of poverty than aid -- of course, we know that.”

There is immense concern about economic inequality, both among the scholarly community and in the general public. . . . However, when people are asked about the ideal distribution of wealth in their country, they actually prefer unequal societies. . . . Despite appearances to the contrary, there is no evidence that people are bothered by economic inequality itself. Rather, they are bothered by something that is often confounded with inequality: economic unfairness. Drawing upon laboratory studies, cross-cultural research, and experiments with babies and young children, we argue that humans naturally favour fair distributions, not equal ones, and that when fairness and equality clash, people prefer fair inequality over unfair equality. Both psychological research and decisions by policymakers would benefit from more clearly distinguishing inequality from unfairness.--------------------------------

Doug: The public, social policy question is, how can we improve each person's life in real terms, not relative to someone else. Media, politicians and 'experts' use a lot of data in this regard to lie and to deceive. Even this article does not acknowledge that pacetti's study is badly flawed.

We study the impact of the minimum wage on firm exit in the restaurant industry, exploiting recent changes in the minimum wage at the city level. The evidence suggests that higher minimum wages increase overall exit rates for restaurants.

Exit rate? Exit means death of employer company, at least in the location of the minimum wage increase.

However, lower quality restaurants, which are already closer to the margin of exit, are disproportionately impacted by increases to the minimum wage. Our point estimates suggest that a one dollar increase in the minimum wage leads to a 14 percent increase in the likelihood of exit for a 3.5-star restaurant (which is the median rating)...